Unifying laws on private investment funds

Recently the market applauded a new law regulating private funds, the Tentative Measures for the Regulation of Private Investment Funds (中国证券监督管理委员会私募投资基金监督管理暂行办法) (Measures), which were promulgated by the China Securities Regulatory Commission (CSRC) and entered into effect on August 21 2014. For the first time, these rules provide a uniform approach at the national level and detailed guidance on the offering of different types of private investment funds in the mainland. Each fund is essentially a tool for pooling funds onshore to deploy for investment by specialised fund managers.

The Measures represent the legislator's initial efforts to unify the trifurcated regulatory system, which has three different government agencies regulating different types of private funds – the National Development and Reform Commission (NDRC) regulating private equity and venture capital funds, the CSRC regulating private fund products offered by securities and fund companies and the China Banking Regulatory Commission (CBRC) regulating private fund products offered by trust companies.

The complicated Chinese regulatory regime for the private fund sector in the context of the recently-issued and forthcoming rules provides a unique perspective for understanding how the different government systems function and interact with each other. A comparison between the new Measures and the private fund laws of the US also provides interesting lessons for investors, managers and practitioners.

Streamlining the regime

As stated above, the old rules followed a segmented approach whereby different regulators were responsible for different types of private funds. There have been little, if any, legislation applicable to all private funds regardless of type and investment. This deviates from market practice around the world and has long been criticised as bureaucratic and inefficient.